Frequently Asked Questions
Inflation and The National Debt
 

For a detailed discussion about money and currency, read our Money series of articles.

1. What is and what causes inflation?
2. How does NESARA control inflation?
3. Why don’t we just avoid paper currency and return to gold and silver coin?
4. What exactly is the national debt, and to whom is the debt owed?
5. How does NESARA immediately cancel approximately $1 trillion of the public debt?
6. Why don’t we just print a 6 trillion dollar note and pay off the Fed? Wouldn’t that eliminate the national debt?
7. Would allowing the Treasury the ability to directly print the currency open the door to political corruption in Congress—wasn’t that a main reason why the Fed was created?
    

What is and what causes inflation?

Simply stated, inflation is caused by increasing the quantity of currency in circulation faster than the amount of available goods and services increases.

There are actually two types of inflation, price and currency inflation. Price inflation is often a result of normal market forces and conditions. Currency inflation, however, is caused by manipulating the currency supply. Price inflation can exist without currency inflation, but currency inflation will always cause price inflation (although the price inflation can be masked).

Inflated currency tends to bid up prices. However, currency inflation can exist without noticeable price increases, but under that condition the lack of price changes is terribly deceiving. That condition exists when manufacturing and technology techniques improve the efficiency of production. Improved efficiency tends to lower the price of goods and services. If during such a period the currency is concurrently inflated, consumers might not see any noticeable difference in prices.

Currency inflation occurred even in times when the currency was something other than paper currency. For example, in early colonial America, tobacco and corn were used as currency. Of course, all anybody had to do was grow corn or tobacco and they had a stash of funds. This is exactly what happened and the quantity of currency in circulation soon outpaced the quantity of available goods and services to be purchased. The result was ever increasing prices of goods and services (with respect to corn or tobacco).

Currency inflation also occurred during the several gold and silver rushes of the nineteenth century because the amount of currency in circulation suddenly exceeded the amount of available goods and services.

The two previous examples show that currency inflation can be caused through normal market conditions even with a commodity currency. As long as the amount of the commodity in circulation as currency remained stable, there was no currency inflation. Increase the amount of the commodity used as currency without a matching increase in goods and services, and prices tend to rise.

No governments were directly involved in causing these bouts with currency inflation. However, in today’s modern world currency inflation is caused directly by government.

To pay expenses, governments collect revenues in two traditional ways, by raising taxes or by borrowing. When governments exercise either of these options, there is no currency inflation because both methods use only the existing currency already in circulation.

Unfortunately, the modern printing press provides a third method to pay for expenses—printing the currency.

Currencies today are nationalized and the governments control the amount of currency in circulation. Normally this would be no problem, but human nature creeps into the picture. Human nature often wants something for nothing.

Many nations throughout history have succumbed to the temptation to pay expenses through currency inflation and have suffered enormous instability in their economies, including total collapse. Modern nations have shown themselves unable to avoid these same temptations and therefore suffer the same fate.

The true root problem is not any grand conspiracy but merely human nature. People tend to want something for nothing. People love those government benefits, but hate paying the full price. Government officials hate levying new taxes because people hate paying taxes and representatives want to be reelected. Borrowing currency already in circulation has limits because as government borrows more, less currency remains in circulation in the private sector. Furthermore, there is a limit to how much debt private investors want to buy and hold.

Therefore, governments use a clever scheme of borrowing through the printing press. The central bank buys that debt, thereby introducing new currency into circulation. The short story is that the central bank buys that debt with funds created out of thin air.

When currency is created privately by monetizing debt at the local level, there is no currency inflation because goods and services back that currency. However, when governments monetize debt, there is almost always inflation because additional goods and services seldom back that new currency. The reason is straightforward: governments are consumers, not producers.

When governments inflate the currency, this inflation acts as a tax because this inflation pays for government expenses. Whenever inflated currency is introduced into the market, the first users of that currency do not experience the inflationary effects. Only those people far down the line eventually feel the inflationary ripples. This tax is not directly visible, but everybody is aware of the pain caused by continually rising prices. Worse, this continual fluctuating of the exchange value of the currency causes turmoil because nobody can depend upon the future exchange value of the currency.

When governments control currencies, there is only one cure for currency inflation and that is to forcibly prevent governments from creating currency. Governments must be limited to collecting revenues by raising taxes or borrowing existing currency already in circulation. Currency creation must occur only at the local level, by the people, where such monetization of debt is backed by additional goods and services.

NESARA provides mechanisms to discourage Congress from creating currency out of thin air, thereby reducing one avenue for currency inflation.
 

How does NESARA control inflation?

Inflation is controlled through two new mechanisms that currently do not exist.

NESARA creates a new mechanism to control the quantity of currency in circulation, the Treasury Reserve Account. This Account acts like a shock absorber, much like the coolant overflow tank works in your car. When cooling pressure builds in your car’s cooling system, the coolant expands and flows into the overflow tank. Similarly, when pressure decreases, coolant contracts and flows back into the cooling system. The design of the system operates using the laws of physics and thermodynamics. Through such a mechanism, pressure and temperature of the system remains stable within operating design.

Controlling the amount of currency in circulation is not easily performed using those same natural laws, but the same design principles can be used. Therefore, we use an external indicator to monitor the exchange value of the currency in circulation. NESARA provides such a tool in the United States Treasury Credit-Note Exchange-Value Index. This Exchange-Value Index is established by law to be maintained within a range of 97 percent to 103 percent.

When the Treasury Reserve Board observes the Exchange-Value Index rising above 100 percent, the Board impounds revenues into the Treasury Reserve Account, removing that currency from circulation.

Conversely, when the Exchange-Value Index drops below 100 percent, the Board can do one of the following: 1) deposit funds into the general treasury, which Congress spends, or 2) by buying public debt; both actions immediately introduce currency into circulation; or 3) by depositing funds at commercial banks; thereby increasing reserves and slowly introducing currency into circulation through loans (monetization of debt). The new Treasury Reserve Board strictly controls this new Account, Congress is not allowed to touch the funds.

As mentioned, funds in the Treasury Reserve Account also may be used to retire the public debt. Under NESARA such debt is held only by private investors. Such a move would introduce currency into circulation and would be done only when the Exchange-Value Index lowers below 100 percent.
 

Why don’t we just avoid paper currency and return to gold and silver coin?

NESARA reintroduces gold and silver coin back into circulation. However, the main reason for not returning solely to gold and silver coin is practicality.

Consider the following numbers. The M1 money supply is approximately $1.1 trillion and the amount of gold on deposit is approximately 261 million ounces. Assume converting into gold coin every M1 dollar in circulation, whether paper currency or bookkeeping digits (checkbook money). If you divide the total ounces of gold by M1 dollars in circulation, you arrive at 0.000237 ounces of gold representing one dollar. At such miniscule amounts of metal, think how small a coin would represent one dollar. How about 50 cents? 25 cents? A dime?

Of course, we could use base metals to provide the bulk of the coin metal content, but how would anybody ever verify that any given coin actually contained the proper amount of gold, especially at such small amounts?

The reason precious metal coins have reeded edges is to discourage shaving a coin. Any return to gold coinage invites nefarious deeds as well as normal abrasion, the latter being addressed by NESARA at Part I, Section 4, (G)(4).

Nonetheless, with such small amounts of precious metal contained in a coin containing base metals, you probably can see that we would have a similar problem to the days when coins were shaved. Not likely to happen and probably not worth the energy and labor.

As far back as the Roman Empire, rulers debased coin content by using smaller and smaller amounts of precious metals in coins. At the miniscule amounts just calculated, we have, more or less, shaved ourselves right out of any commodity value a coin might contain.

Furthermore, modern governments have shown that a hard currency will not stop officials from debasing the standard because all they need do is change the statutory definitions. Granted, debasing a commodity currency in such a manner is much slower and clumsy than the current method, but history shows that officials will not stop just because of the substance of the currency.

Take the reciprocal of the number of ounces of gold per dollar to determine dollars per ounce and you arrive at $4,215. In other words, a coin containing one ounce of gold would contain an exchange value of $4,215. Would you care to carry that coin in a pocket that might have a hole? How many merchants do you think would accept such a coin in normal everyday commerce?

We would never consider quoting John Maynard Keynes and call gold (or silver) a “barbaric relic” because we think gold (and silver) have proper roles in a currency system, but we believe having only those commodities for currency is highly impractical. Perhaps impossible.

The truth is that during the days of gold and silver coins, most people preferred to carry paper currency. Before Federal Reserve Notes displaced them, bank notes, greenbacks, and silver and gold certificates were convenient and quite popular.

Our current monetary problem is not the substance of the currency, but who owns the currency system, who receives the benefits of that ownership, and currency inflation.

NESARA solves these problems by declaring that the people own the currency system, that they should get the benefits of that ownership, and that in any moral currency system the only acceptable rate of inflation is zero. Currency inflation causes the expected exchange value of the currency to decrease, thereby robbing people of expected purchasing power.

NESARA restores gold and silver coin to circulation at reasonable exchange values, thus providing an alternative currency to those who do not wish to use paper currency or base metal coins. NESARA also returns meaningfulness to the word “dollar” by restoring the definition to the real world.
 

What exactly is the national debt, and to whom is the debt owed?

Simply put, the national debt is the money Congress owes to whomever Congress has borrowed from. The national debt, more properly called the public or federal debt, is an accumulation of yearly Congressional budget deficits.

Constitutionally, Congress has authority to borrow. In concept, Congress borrows much the same way you or I borrow when we sign an IOU for money received and then receive money. For example, Congress uses savings bonds and treasury bills to serve as the IOU. Congress also borrows through the Federal Open Market Committee.

Actually, Congress only increases its self-imposed debt limit; the U.S. Treasury does all the work at auction through issuing and selling commercial instruments: bonds, bills and notes.

The problem with the public debt is that through the machinations of the Federal Reserve and Treasury, Congress does not always borrow currency in circulation, but creates currency out of thin air. When that debt is purchased by individuals, currency already in circulation is used and that debt is not inflationary. However, when the Fed buys the debt, the Fed creates the currency out of thin air and this move is inflationary. This currency is spent on consumables and “entitlements.” Such spending is backed by no goods and services, and hence, is inflationary. NESARA solves this problem by forcing Congress to borrow largely only currency in circulation.

Congress committed the American people to repay anyone holding those IOUs. Some holders are Americans, some are foreign and some are just internal bookkeeping between various government departments. Therefore, the national debt is owed by Congress, representing the American people, to whomever holds one of those IOUs.
 

How does NESARA immediately cancel approximately $1 trillion of the public debt?

Once NESARA becomes law, several changes take place. One change is that commercial banks no longer can hold as reserves any income producing U.S. debt obligations. Therefore, to maintain reserves all banks must trade these obligations for the newly created Treasury Reserve credit-notes. (Banks can keep the obligations as assets, but will be unable to count the obligations as reserves.)

Before converting the Federal Reserve System to the New Treasury Reserve System, all obligations held by the Federal Reserve System are traded for credit-notes.

Because those newly received credit-notes are to be used as reserves, they do not enter into circulation and are therefore not inflationary.

Once the Secretary of Treasury receives all of these debt obligations, the Secretary merely cancels them out of existence, thereby significantly reducing the public debt. The actual amount eliminated is unknown, but $1 trillion is a reasonable figure.

Realize, of course, that the debt held by the Fed is largely bookkeeping. The real debt is held by private investors—you.
 

Why don’t we just print a 6 trillion dollar note and pay off the Fed? Wouldn’t that eliminate the national debt?

Hardly. The Fed owns only a small percentage of the national debt. The remainder is owned by you and other investors—treasury bills, savings bonds, etc.

Furthermore, although the interest owed by the Fed is real, any amount not spent throughout the year is returned to the Treasury. Lastly, NESARA will render the whole discussion moot. The debt owed to the Fed is largely mere bookkeeping. That is, once NESARA becomes law, the debt “owed” to the Fed is effectively cancelled. Of course, that move does not eliminate the debt owed to private investors.
 

Would allowing the Treasury the ability to directly print the currency open the door to political corruption in Congress—wasn’t that a main reason why the Fed was created?

Yes, that is one reason why the Fed was created. Yes, allowing the Congress (through the Treasury) to manipulate the currency supply could cause havoc.

However, NESARA discourages such mischief. Under NESARA, Congress is largely able to borrow only currency already in circulation. Unlike today’s system, under NESARA no mechanism would exist for Congress to easily create currency out of thin air. Although the majority of the currency in circulation today is electronic digits and paper, the concept in practice works the same as if only actual coin were in circulation. Currency creation would be reserved largely to the people at the local level. NESARA restores respectability to the word “borrow.”